Econ 102 Midterm Exam QUESTIONS AND ANSWERS | VERIFIED
100% CORRECT 2026 UPDATE WITH COMPLETE SOLUTIONS
National Saving - ANSWER-S=Y-C-G, the total income in the economy that remains
after paying for consumption and government purchases
Saving - ANSWER-a flow variable itself because it is defined over a period of time,
normally a year
Private Saving - ANSWER-S=Y-C-T, what people earn(Y)-what they spend on
consumption(C) and taxes(T)
Public Saving - ANSWER--T-G
-what the government earns in taxes-what it spends
-budget surplus
-negative in most countries, representing a deficit
If the economy is closed - ANSWER-it does not trade with other countries->NX=0->I=S
I=S - ANSWER-balance condition, the saving of a lot of people ends up equaling the
investment of a lot of other people, equilibrium
Real Interest Rate - ANSWER--Nominal Interest Rate-Inflation
-brings the market into equilibrium
-determines NCO
-determined by our desire to save and invest
Real Interest Rate High - ANSWER--people get an incentive to save more
-it becomes more expensive to borrow->firms invest less
S>I - ANSWER-people take money to banks and earn interest but banks do not see the
demand for loans from firms->banks are losing money on these deposits->banks will
lower IR->people will save less->firms invest more->banks do this until S&I are =
S<I - ANSWER-banks will increase the IR until market comes to equilibrium
Supply/Saving - ANSWER--shifted by people's desire and ability to save
-depends positively on RIR
Demand/Investment - ANSWER--the desire of firms to invest in the economy+desired
NCO
-depends positively on productivity of capital
, -depends negatively on RIR
Real Rate - ANSWER-shows how much more in consumption baskets they get
Sources of Finance - ANSWER-1. Reinvested Earnings, 2. Debt Finance/Borrowing, 3.
Equity Finance
Reinvested Earnings - ANSWER--use current profits to cover investment projects
-pros-simple+cheap
-cons-not all companies have the necessary earning to cover the investment project
Debt Finance/Borrowing - ANSWER--borrowing from the market directly by issuing and
selling bonds
-can take the form of loans/bonds
-cons-it is available only to established companies with a
good reputation
Equity Finance - ANSWER--sell stock of your firm to investors
-find an investor who will give you money in return for a portion of ownership in the
business
-cons-existing owners lose part of their control over the company
Financial Intermediaries - ANSWER-banks take money from savers and lend to
borrowers, banks pay a lower interest to depositors and then charge a higher interest on
loans
Margin - ANSWER-the difference between banks paying a lower interest and charging a
higher interest on loans, primary source of bank profits
Bond - ANSWER--a certificate that says the obligation of the borrower to the lender
-a firm can sell a bond which promises to return a bigger amount of money in the future
-pros-you do not need an intermediary(the bank
-cons-only available to big established corporations with good reputations
Joint Stock Companies - ANSWER-companies owned by shareholders, many big
corporations, each share of stock represents ownership of a piece of this company
Secondary Market - ANSWER--bonds and stocks can be traded here once issued and
sold
-prices fluctuate a lot due to supply and demand
-trade takes place at stock exchanges
-stock market indices demonstrate price of overall market
S= - ANSWER-Y-C-G=(Y-C-T)+(T-G)
Anna takes $100 from her bank account and buys a Government bond - ANSWER-not
savings because no income
Anna takes $100 from her bank account and buys a textbook - ANSWER-savings
Shop earns $1000 in profits and spends it on a party for the employees - ANSWER-C
increases by 1000, I increases by 1000 so no effect on savings
Motives for Private Saving - ANSWER-retirement, precautionary saving, bequest
motive(leave money for children/charity)
Government Policies that affect Private Saving - ANSWER--eliminating the tax on IR
increases saving
-switching from redistributive pensions system to fully funded pension system increases
saving
-eliminating estate tax increases saving
100% CORRECT 2026 UPDATE WITH COMPLETE SOLUTIONS
National Saving - ANSWER-S=Y-C-G, the total income in the economy that remains
after paying for consumption and government purchases
Saving - ANSWER-a flow variable itself because it is defined over a period of time,
normally a year
Private Saving - ANSWER-S=Y-C-T, what people earn(Y)-what they spend on
consumption(C) and taxes(T)
Public Saving - ANSWER--T-G
-what the government earns in taxes-what it spends
-budget surplus
-negative in most countries, representing a deficit
If the economy is closed - ANSWER-it does not trade with other countries->NX=0->I=S
I=S - ANSWER-balance condition, the saving of a lot of people ends up equaling the
investment of a lot of other people, equilibrium
Real Interest Rate - ANSWER--Nominal Interest Rate-Inflation
-brings the market into equilibrium
-determines NCO
-determined by our desire to save and invest
Real Interest Rate High - ANSWER--people get an incentive to save more
-it becomes more expensive to borrow->firms invest less
S>I - ANSWER-people take money to banks and earn interest but banks do not see the
demand for loans from firms->banks are losing money on these deposits->banks will
lower IR->people will save less->firms invest more->banks do this until S&I are =
S<I - ANSWER-banks will increase the IR until market comes to equilibrium
Supply/Saving - ANSWER--shifted by people's desire and ability to save
-depends positively on RIR
Demand/Investment - ANSWER--the desire of firms to invest in the economy+desired
NCO
-depends positively on productivity of capital
, -depends negatively on RIR
Real Rate - ANSWER-shows how much more in consumption baskets they get
Sources of Finance - ANSWER-1. Reinvested Earnings, 2. Debt Finance/Borrowing, 3.
Equity Finance
Reinvested Earnings - ANSWER--use current profits to cover investment projects
-pros-simple+cheap
-cons-not all companies have the necessary earning to cover the investment project
Debt Finance/Borrowing - ANSWER--borrowing from the market directly by issuing and
selling bonds
-can take the form of loans/bonds
-cons-it is available only to established companies with a
good reputation
Equity Finance - ANSWER--sell stock of your firm to investors
-find an investor who will give you money in return for a portion of ownership in the
business
-cons-existing owners lose part of their control over the company
Financial Intermediaries - ANSWER-banks take money from savers and lend to
borrowers, banks pay a lower interest to depositors and then charge a higher interest on
loans
Margin - ANSWER-the difference between banks paying a lower interest and charging a
higher interest on loans, primary source of bank profits
Bond - ANSWER--a certificate that says the obligation of the borrower to the lender
-a firm can sell a bond which promises to return a bigger amount of money in the future
-pros-you do not need an intermediary(the bank
-cons-only available to big established corporations with good reputations
Joint Stock Companies - ANSWER-companies owned by shareholders, many big
corporations, each share of stock represents ownership of a piece of this company
Secondary Market - ANSWER--bonds and stocks can be traded here once issued and
sold
-prices fluctuate a lot due to supply and demand
-trade takes place at stock exchanges
-stock market indices demonstrate price of overall market
S= - ANSWER-Y-C-G=(Y-C-T)+(T-G)
Anna takes $100 from her bank account and buys a Government bond - ANSWER-not
savings because no income
Anna takes $100 from her bank account and buys a textbook - ANSWER-savings
Shop earns $1000 in profits and spends it on a party for the employees - ANSWER-C
increases by 1000, I increases by 1000 so no effect on savings
Motives for Private Saving - ANSWER-retirement, precautionary saving, bequest
motive(leave money for children/charity)
Government Policies that affect Private Saving - ANSWER--eliminating the tax on IR
increases saving
-switching from redistributive pensions system to fully funded pension system increases
saving
-eliminating estate tax increases saving
